Institute for Social Science Research

Rural industry is the most dynamic sector in China. I argue that rural industrialization is funded by agricultural accumulation, driven by surplus labor, and sustained by human capital. Rural reforms since 1978 have allowed Chinese peasants to retain a larger share of agricultural surplus to be transferred into rural industries. Rural surplus labor and shortage of farmland drive rural industrialization by the dynamic of extensive growth. Education is crucial for rural industrialization because market competition raises returns to human capital and industries need schooling more than does agriculture. 1991 data of 1,903 counties show that the top 10% of the counties produced over half of the total output by rural enterprises whereas the bottom 50% contributed little. Regression analyses confirm the above argument and find that education is the strongest predictor of rural industrial development.